Financial Management: Hedging Strategies and Foreign Direct Investment

This report provides an analysis of hedging strategies and foreign direct investment (FDI) in the context of international financial management. It evaluates different hedging strategies, including unhedged, money market hedge, and call option strategy, to determine the most cost-effective approach for a US organization needing to deliver £1,000,000 in one year, concluding that the money market hedge is the optimal choice. Additionally, the report examines the countries with the most FDI inflows in 2018, identifying the United States, China, and Hong Kong as leading destinations due to their high return generation capabilities and security for investors. It highlights the role of FDI in shaping global investment flows and supporting development in countries with low financial capabilities. Desklib offers a platform to access this and other solved assignments for students' academic support.

Running head: INTERNATIONAL FINANCIAL MANAGEMENT
International Financial Management
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Question 1: Identifying the best possible hedge strategy...........................................................3
Question 2: Foreign Direct Investment......................................................................................5
Reference and Bibliography:......................................................................................................7

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Question 1: Identifying the best possible hedge strategy
Particulars Probability 80% Probability 20%
Spot rate today 1.8 1.8
Expected change -2.80% 4.20%
Expected exchange
rate 1.8*(1-2.80%) 1.8*(1+4.20%)
Expected exchange
rate 1.7496 1.8756
Unhedged Strategy:
Unhedged Strategy
Future spot rate Probability Probable payouts Probable payouts
1.7496 0.8 1.7496 * £ 1,000,000 $ 1,749,600.00
1.8756 0.2 1.8756 * £ 1,000,000 $ 1,875,600.00
Money Market Strategy:
Money Market Hedge
Process Particulars Value
Process
1 Payment in GBP (A) £ 1,000,000
Interest Expenses UK @8% (B) (1+8%) = 1.08
Total Amount of money borrowed in GBP [C=A/B] £ 925,926
Process
2 Total Amount of money borrowed in GBP (C) £ 925,926
Current Spot Rate (D) $ 1.80
Converted amount in USD [E=C*D] $ 1,666,667
Process
3 Converted amount in USD (E) $ 1,666,667
Depositing rate in US (F) 6%
Interest received after 1 year [G=E*F] $ 100,000
Cost [H=G+E] $ 1,766,667
Call Option Strategy:

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Scenario 1 Value
Future spot rate (A) 1.7496
Premium (B) 0.0300
Total Cost of conversion (C=A+B) 1.7796
Payment (D) £ 1,000,000
Cost including the premium
(E=C*D) $ 1,779,600
Scenario 1 Value
Exercise price (A) 1.7900
Premium (B) 0.0300
Total Cost of conversion (C=A+B) 1.8200
Payment (D) £ 1,000,000
Cost including the premium
(E=C*D) $ 1,820,000
Call Option Strategy
Future spot
rate Probability Payouts with cost and Option
1.7496 0.8 $ 1,779,600.00
1.8756 0.2 $ 1,820,000.00
From the overall evaluation, the best possible hedging strategy is the money market
hedge, as it allows the US organisation to incur the least amount of cost in delivering
£1,000,000 pound in one year.

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Question 2: Foreign Direct Investment
Figure 1: Countries with the most FDI inflows in 2018
(Source: Gfmag.com, 2018)
The above figure depicts the three most widely invested FDI countries in the world
during 2018. United States, China and Hong Kong are considered to have the highest foreign
direct investment in comparison to other countries in the world. USA is relevantly considered
to have high political risk, due to the presence of the president Donal Trump. However, it is
still considered to provide higher return for the investors all around the world. The Chinese
government has the highest level of risk involved for investors all the around the world, while
it also generate higher returns due to the high growth capability. Both USA and China has
higher FDIs due to their high level of return generation capability. Hong Kong is considered a
trade hub where the overall gains allow the FDI to increase the level of income while the
country does not have high political risk. The high FDI inflows are mainly due to the growth

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and security of the investors, which is guaranteed by the USA, China and Hong Kong. This is
the main reason why the three countries have attracted high FDIs than other countries in the
world. Qu & Green (2018) indicated that FDIs shape the investment flow of the world, which
helps in developing countries with low financial capability.

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Reference and Bibliography:
Gfmag.com. (2018). Global Finance Magazine. Retrieved 6 December 2018, from
https://www.gfmag.com/topics/macroeconomy-and-globalization/countries-most-fdi-
inflows-2018
Qu, T., & Green, M. B. (2018). Chinese foreign direct investment: A subnational perspective
on location. Routledge.